PHOENIX — Like the CEOs of the other big problem credit unions, Arizona FCU's Ron Westad has a dilemma: should he continue to reduce his size to improve his net worth ratio but also hurt his CU's chances to take full advantage of a rebound when it comes?
Over the last 18 months the state's second-largest credit union has closed branches, reduced its workforce and shed more than $400 million in assets as it struggled with a staggering $150 million of losses. The reduction in size, a strategy increasingly approved by NCUA for its large problem credit unions, has enabled Arizona Federal to retain a 2.5% net worth ratio, even as its total net worth continues to decline, pointed out Westad. "So we continue on this path of asset reduction," he said.
But Westad, whose CU is one of 10 billion-dollar credit unions operating under NCUA net worth restoration agreements, worries what long-term effect the shrinkage, which entails the run-off of tens of millions of dollars in deposits, will have. "We're not attracting member deposits. Our rates are in the lower end of the market," he said.
Steve Renock, the new president of Kern Schools FCU, which is working with NCUA on a net worth restoration plan, acknowledged the problem, which has shrunk by $175 million over the past 18 months. That has allowed the one-time $1.8 billion CU to retain a net worth ratio of just under 5% even as it lost more than $60 million during that period.
Other large CUs on NCUA's special case list are undergoing similar shrinkage. Suncoast Schools FCU has shed $650 million over the last 15 months. Kinecta FCU has reduced its size by almost $600 million. Wescom Central CU has cut its size by more than $600 million. GTE FCU has shed more than $400 million.
"I don't know if it is the best way to restore the net worth ratio; it certainly is an effective way to restore the net worth ratio," said Kern Schools' Renock, who succeeded the credit union's long-time CEO Vince Rojas two weeks ago. "You have to be careful of the effects on members, so that when we start to see that pick up in loan demand that these members will stay with us." Even in the face of lower rates paid on dividends, Kern Schools is offering to find members better rates, in hopes they will retain their business.
Sarasota Coastal CU's Thomas Randle, who was forced last week to merge his CU because of diminished capital, chafed at the net worth restoration plan enforced on the one-time $240-million CU by state regulators before the merger into Achieva CU. "What am I going to do? I've cut staff, stop contributing to their 410(k)s, cut rates, cut $16 million from my operating budget, cut my cost of funds by $2 million," said Randle. The combination of cost-cutting amounted to a death spiral, he suggested, even as it restored his credit union's net worth ratio to just below 5%.
